U.S. Stocks Fall as Bonds Rise on Budget, Fed Concern

Silver declined to $22.9840 an ounce and platinum was down at 1,460.75 an ounce. Photographer: Meridith Kohut/Bloomberg

Sept. 20 (Bloomberg) -- U.S. stocks fell the most since
August and Treasuries rose as concerns grew that political
debate over government spending and potential Federal Reserve
stimulus cuts may pose a threat to economic growth. Emerging-markets shares dropped and gold retreated the most in 11 weeks.

The Standard & Poor’s 500 Index dropped 0.7 percent at 4
p.m. in New York for its biggest drop since Aug. 27. The Stoxx
Europe 600 Index declined 0.3 percent. Yields on 10-year
Treasuries slipped two basis point to 2.73 percent. The MSCI
Emerging Markets Index fell after rallying 2.2 percent
yesterday, as India’s banks drove a slump in financial shares.
The S&P GSCI Index slid 0.7 percent after gold declined 2.7
percent and silver had the biggest retreat in three months. Oil
fell to a one-month low.

Fed Bank of St. Louis President James Bullard said a small
tapering of bond buying is possible next month after the central
bank made a close call this week in deciding not to slow
purchases. The Federal Open Market Committee said it wants more
evidence of an economic recovery before paring its $85 billion-a-month bond-buying program. The U.S. House voted to finance the
federal government through mid-December and choke off funding
for President Barack Obama’s health-care law, setting up a
showdown with the Senate and the White House.

“It’s probably a little confusing to the market what’s
coming out of the Fed,” John Kvantas, a San Antonio, Texas-based executive director who helps manage more than $16 billion
at USAA Investments, said in a phone interview. “Maybe the Fed
is trying to send a message that ‘yeah we didn’t taper, but it
doesn’t mean we will never taper and maybe actually will taper
still quite soon.’”

Index Rebalancing

About 8.9 billion shares changed hands on U.S. exchanges,
the most since June 28, as futures and options contracts expire
in a process known as quadruple witching. Announced index
changes, including the addition of Visa Inc., Goldman Sachs
Group Inc. and Nike Inc. to the Dow Jones Industrial Average,
take effect after the markets’ close. The operator of the S&P
500 also did its quarterly rebalancing of the index to adjust
member weightings. The Dow tumbled 1.2 percent, the most since
Aug. 15.

The S&P 500 rallied 1.3 percent this week and is up 4.7
percent for September, rebounding from its worst month since May
2012, after the central bank unexpectedly refrained from
reducing monetary stimulus. The stimulus helped boost the equity
index as much as 155 percent higher since March 2009. The S&P
500 and the Dow Jones Industrial Average reached record highs on
Sept. 18 after the Fed’s announcement.

Fed Speeches

Bullard said today at the New York Association for Business
Economics luncheon that he wants to see higher inflation before
backing less accommodation from the central bank. Kansas City
Fed President Esther George, who dissented at the last FOMC
meeting, said at the Manhattan Institute for Policy Research
that the Fed needs credibility for markets to trust its
guidance. Policy makers meet Oct. 29-30.

“Weaker data came in,” Bullard said earlier in the day on
Bloomberg Television’s “Bloomberg Surveillance” with Tom Keene
and Michael McKee. “That was a borderline decision,” and “the
committee came down on the side of, ‘Let’s wait.’” With
inflation low, Bullard said, “we can afford to be patient.”

Twenty-four of 41 economists surveyed Sept. 18-19 said the
Fed will now wait until December before taking the first step in
slowing its $85 billion in monthly bond purchases, according to
a Bloomberg survey. The median estimate in an Aug. 9-13 poll
projected the Fed would begin paring at this week’s meeting.

Economic Reports

Reports next week on data from second-quarter gross
domestic product to consumer confidence and new home sales may
help investors gauge the prospect of economic growth.

Investors are also watching the political wrangling over
the approaching limit on federal spending. Government funding
expires Oct. 1 and the Treasury is expected to exhaust its
ability to borrow funds in mid-October, when it will hit the
statutory debt limit. The White House said President Obama would
veto the House bill. The Senate will consider its version of the
funding measure next week.

“When you look at political uncertainty and a fight going
forward and the government really faces a shutdown, I don’t know
how that can be construed as a positive in markets’ mind,” Bill
Schultz, chief investment officer who oversees about $1.1
billion at McQueen Ball & Associates in Bethlehem, Pennsylvania,
said by phone. “If anything, it just means potentially less
economic activities.”

Treasury Yields

The yield on 10-year Treasuries dropped 15 basis points
this week, the most since the five days ended July 12. The rate,
the benchmark for loans ranging from mortgages to corporate
bonds, climbed to a two-year high of 3.01 percent on Sept. 6,
from 1.93 percent on May 21, the day before Fed Chairman Ben S.
Bernanke said the central bank could slow the pace of asset
purchases in the next few policy meetings.

Global equity funds attracted the largest inflows since at
least 2005 in the week ended Sept. 18 as investors piled into
stocks.

The funds lured a net $25.9 billion in the period, Wei
Liang Chang, a foreign-exchange strategist at Australia & New
Zealand Banking Group Ltd., said by phone from Singapore today,
citing data from EPFR Global. Developed markets posted $24.3
billion of inflows, while emerging-nation funds drew $1.6
billion, according to Chang.

German Elections

The dollar rose versus most of its 16 biggest peers. The
euro fell 0.1 percent to $1.3523, ending a four-day run of
gains. It dropped 0.2 percent to 134.35 yen.

The Stoxx Europe 600 Index pared its gain for the week to
0.9 percent. Adidas AG fell 3 percent as the world’s second-largest maker of sporting goods cut its profit forecast. Direct
Line Insurance Group Plc retreated 3.7 percent as Royal Bank of
Scotland Group Plc sold a 630 million-pound ($1 billion) stake
in the U.K. insurer. Foxtons Group Plc surged 16 percent in
London on the real estate broker’s first day of trading after
its initial public offering.

Emerging Markets

The MSCI Emerging Markets Index fell from a four-month
high, dropping 0.9 percent to 1,013.18, led by Indian shares.
The gauge rose 2.7 percent this week. The measure’s 14-day
relative strength index was at 69.6, falling below 70 for the
first time in five days. The level of 70 indicates to some
analysts a security has climbed too far too fast.

India’s benchmark Sensex Index tumbled 1.9 percent, the
steepest drop in more than two weeks, after central bank
Governor Raghuram Rajan surprised analysts by raising the
benchmark interest rate in his first policy review. Lenders led
the decline, with ICICI Bank Ltd. tumbling 4.7 percent. The
rupee slid 0.8 percent against the dollar.

Rajan, who took office two weeks ago, boosted the
repurchase rate by a quarter point to 7.5 percent. All 36
analysts in a Bloomberg News survey predicted no change.

Markets in China, Hong Kong, South Korea and Taiwan were
shut for holidays.

Turkey’s lira weakened 1.1 percent to 1.9815 against the
dollar, trimming this week’s rally to 2.3 percent, the biggest
gain since January 2012.

Gold declined the most since July 5, losing 2.7 percent to
$1,332.50 an ounce. The metal climbed 1.8 percent this week.
Silver slumped 5.9 percent, the biggest drop since June 20, to
$21.93 an ounce to lead declines among 24 raw materials in the
S&P GSCI Index.

West Texas Intermediate oil dropped 1.6 percent to $104.67
a barrel after decreasing the same amount yesterday as Libya’s
oil production expanded and President Bashar al-Assad said Syria
will make information about its chemical weapons available.
Crude lost 3.3 percent for the week, the biggest five-day drop
since June.